PARTNERSHIP ACCOUNTS - BASIC CONCEPTS

Learning Objectives

After studying this Chapter, you will be able to:

• ·         understand the meaning and the features of partnership.
• ·         prepare the capital accounts of partners under fixed and fluctuating capital methods.
• ·         understand the distribution of profits among the partners.
• ·         prepare the Profit and Loss appropriation account.
• ·        know the meaning, nature and methods of valuation of goodwill. 

A business may be organised in the form of a sole proprietorship, a partnership firm or a company. The sole proprietorship has its limitations such as limited capital, limited managerial ability and limited risk – bearing capacity. Hence, when a business expands, it needs more capital and involves more risk. Then two or more persons join hands to run it.They agree to share the capital, the management, the risk and the Profit or Loss of the business. Such mutual relationship based on agreement among these persons is termed as “Partnership”. The persons who have entered into partnership are individually known as ‘Partners’ and collectively as ‘Firm’.

1 Definition:

The Indian Partnership Act 1932, Section 4, defines partnership as “the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all”.

1.1 Features:

Based on the above definition, the essential features of partnership

are as follows.

1. An association of two or more persons: To form a partnership, there must be atleast two persons. Regarding the maximum number of persons, it is limited to 10 in banking business and 20 in other business.

2. Agreement between the Partners: The relationship among the partners is established by an agreement. Such agreement forms the basis of their mutual relationship.

3. Profit sharing: The agreement between the partners must be to share the profits or losses of the business.

4. Lawful business: The agreement should be for carrying on some legal business to make profit.

5. Business carried on by all or any of them acting for all: Partnership business must be carried on by all or any of them acting for all. Mutual and implied agency is the essence of partnership.

1.2 Accounting rules applicable in the absence of Partnership deed:

Normally, a partnership deed covers all matters relating to mutual relationship among the partners. But, in the absence of agreement, the following provisions of the Indian Partnership Act, 1932 shall apply for accounting purposes.

1. Interest on Capital : No interest is allowed on Capitals of the Partners. If as per the partnership deed, interest is allowed, it will be paid only when there is profit. If loss, no interest will be paid.

2. Interest on Drawings : No interest will be charged on drawings made by the partners.

3. Salary/ Commission to partner : No partner is entitled to salary/commission from the firm, unless the partnership deed provides for it.

4. Interest on loan : If any partner, apart from his share capital, advances money to the firm as loan, he is entitled to interest on such amount at the rate of six percent per annum.

5. Profit sharing ratio : The partners shall share the profits of the firm equally irrespective of their capital contribution.

Lesson continue to next Part -   PARTNER CAPITAL ACCOUNT